Fiscal faceoff on Capitol Hill

The weeks of threats of a government shutdown, and the late-night political brinkmanship between House Republicans, Senate Democrats and President Barack Obama, turns out to have been a mere warm-up. America’s grand fiscal drama is just getting started.

The standoff that kept the public on edge about national parks and tax-return processing only resolved spending for the rest of the fiscal year, which ends on Sept. 30. Leaders ultimately agreed on US$38.5 billion in budget cuts across a range of government departments. It’s a massive one-year cut not seen since the Reagan era, but in terms of the projected 2011 deficit of $1.6 trillion (all figures in U.S. dollars), a mere rounding error. Still, Republican House Speaker John Boehner claimed victory for wringing the concessions from the Democratic-led White House and Senate. But the Republican lawmakers—swept into office by Tea Party fury and a promise to cut $100 billion in spending the first year—pronounced themselves disappointed.

Democrats shielded spending for early childhood education, university grants for low-income students, and medical research grants, among others. And Republicans failed in their effort to use the funding deal to cut off government funding for Planned Parenthood, which provides contraception and abortion, and to roll back some environmental regulations. (Social conservatives did, though, extract a price for the final late-night compromise: a ban on government funding for abortions in Washington, which is overseen by the federal government. This led to the remarkable sight of the outraged Democratic mayor of the nation’s capital, Vincent Gray, arrested as he protested the deal in front of the Capitol building.)

With the shouting about the budget compromise still echoing, another faceoff is already under way, this time over raising the legal limit on federal borrowing. The U.S. government is expected to reach the congressionally mandated borrowing cap of $14.3 trillion by mid-May. Unless the cap is raised, Washington will have to stop borrowing, at a time when borrowing accounts for nearly 40 per cent of the federal budget. Republicans say they will approve a cap increase only if it is accompanied by additional spending cuts and reforms. “My members won’t vote to increase the debt limit unless we take serious steps in the right direction,” Boehner told Fox News. Democrats accuse Republicans of holding the entire economy hostage because a failure to raise the cap could lead the U.S. government to default on its debts, an outcome that both the White House and Wall Street have called “catastrophic.”

Meanwhile, another battle is brewing over the 2012 budget. Republicans fault Obama for failing to tackle America’s long-term debt in the budget plan he laid out in February. In response, the House budget committee chairman, Wisconsin Republican Paul Ryan, released his own 2012 budget plan that would make unprecedented spending cuts, including slashing entitlement programs such as Medicaid and Medicare (the government health plans for the poor, elderly and disabled). The proposed changes would cost $6.3 trillion less than Obama’s budget as they take effect over 10 years. Some conservatives hailed the plan as “brave,” but liberals called it a fraud. Critics fault Ryan’s proposal for offering tax cuts to upper-income earners and corporations that would actually make balanced budgets more difficult to achieve, and for leaving a bloated defence budget untouched while slashing social safety-net programs. It would also sharply increase out-of-pocket health care costs for future retirees, and rescind Obama’s health insurance reform law, along with its measures aimed at curbing the growth in medical costs.

In response, Obama was scheduled to lay out his own plan for cutting the debt on Wednesday, one that was expected to include less drastic cuts to Medicare and Medicaid, along with cuts to military spending and tax increases for the highest earners. Meanwhile, a bipartisan “Group of Six” senators are working on their own proposal, which would combine cuts to entitlement programs with broad tax reform that they hope could pass the closely divided Senate. They based their work on the December report of a bipartisan fiscal commission put together by Obama.

What this season of proposals and posturing will ultimately add up to remains to be seen. Washington will have to tackle its deficits and ballooning debt—eventually, said William Galston, a fellow at the Brookings Institution. “I am confident that it will happen no later than the next presidential term—no matter who is the president,” said Galston, a former adviser to president Bill Clinton. “Because I don’t think the global markets will allow us to continue on this path much longer.”